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Risk Shifting, Technology Policy and Sales Contingent Claims: When is Launch Aid to the Aerospace Industry A Subsidy?

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  • Kaivanto, Kim
  • Stoneman, Paul

Abstract

This Paper studies the criteria with which the presence or absence of ‘subsidy’ in sales contingent Launch Aid R&D support may be determined when payoff-relevant market incompleteness limits the precision of market-based pricing to non-trivial intervals. The criteria currently employed in WTO and EU proceedings are consistent with correct accounting for the opportunity cost of capital when markets are complete and frictionless, but fail in the presence of payoff-relevant market incompleteness where the interval between bid and ask prices may not be finessed away. An economic definition of subsidy must necessarily capture opportunity cost, and we develop a definition that fully incorporates government’s opportunity cost in both complete and incomplete market settings. With this in hand we then revisit some commonly posed questions concerning the subsidy status of Launch Aid, giving indication of how they may be best resolved by those in possession of the relevant details.

Suggested Citation

  • Kaivanto, Kim & Stoneman, Paul, 2004. "Risk Shifting, Technology Policy and Sales Contingent Claims: When is Launch Aid to the Aerospace Industry A Subsidy?," CEPR Discussion Papers 4798, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4798
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    Citations

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    Cited by:

    1. Kaivanto, Kim & Zinober, Alan, 2015. "When are Capital Structure Decisions Nonseparable from Production Planning? The Case of Generalized Royalty-Based Hybrid Finance," MPRA Paper 66963, University Library of Munich, Germany.
    2. Kim Kaivanto & Alan Zinober, 2015. "When are capital structure decisions nonseparable from production planning?," Working Papers 96496260, Lancaster University Management School, Economics Department.
    3. Kaivanto, Kim & Stoneman, Paul, 2007. "Public provision of sales contingent claims backed finance to SMEs: A policy alternative," Research Policy, Elsevier, vol. 36(5), pages 637-651, June.

    More about this item

    Keywords

    civil aerospace; incomplete markets; R&D; sales contingent claims; subsidies;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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